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The Role of The Audit Committee PDF
The Role of The Audit Committee PDF
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"Corporate governance is
concerned with holding
the balance between
economic and social goals
and between individual
and communal goals...the
aim is to align as nearly as
possible the interests of
individuals, corporations
and society."
In terms of Section 301 of the SOx Act, the following requirements are set out in
respect of audit committees:
z
The audit committee of the issuer shall be directly responsible for the
appointment, compensation and oversight of the work of any registered
public accounting firm employed by that issuer.
The audit committee shall establish procedures for the "receipt, retention,
and treatment of complaints" received by the issuer regarding accounting,
internal controls and auditing.
Each issuer shall provide appropriate funding to the audit committee for
payment of compensation to the registered public accounting firm and any
advisors employed by the audit committee.
The Code recommended that the audit committee should be granted the
broadest range of authorities to assist the board of directors with the
organization and monitoring of the financial and business activities of the
company.
In 2007 the Federal Service for Financial Markets determined in Regulations
on the Operations to Organize Trading on the Securities Markets the
establishment of an audit committee at a joint stock company as one of the
mandatory terms for the inclusion of shares in quotation lists , B and C. The
following were categorized as exclusive functions of the audit committee:
assessment of the auditors opinion, assessment of the effectiveness of the
internal controls procedures of the issuer and the drafting of proposals on how
to improve them. The Federal Service for Financial Markets also determined the
requirements on the members of the audit committee. For example, only
independent directors should be members of the audit committee. In
exceptional cases members of the audit committee may include directors,
provide that they are not the sole executive authority and/or members of the
collegiate executive authority. An independent director should head the audit
committee.
In turn, the Russian stock exchanges MICEX and RTS included corresponding
demands for issuers in their rules of admitting securities for trading. At the
same time, the rules of the Russian stock exchanges do not expand the
requirements of the Regulations on the operations on how to organize trading
on the securities market.
Key responsibilities
The most effective audit committees are not only critically aware of their
responsibilities but also completely understand and embrace them, and
recognise what is necessary to fulfill them effectively. The work of the audit
committee has been evolving in response to changes in the business
environment and leading practices.
Effective corporate governance depends on the active and collaborative
participation of all its principal champions the audit committee, board of
directors, independent external auditors, internal auditors and management.
Ensuring that this collaboration occurs economically, efficiently and effectively
is fundamental to an audit committees success. Its functions and
responsibilities, which are approved by the board of directors, vary from
organisation to organisation, but each committees key responsibilities are
essentially the same.
control activities: which are the policies and procedures that help ensure
that the necessary actions are taken to address risks to the achievement of
the organisation's objectives;
monitoring: which assesses the performance of the control system over time.
Understand and assess the appropriateness of management's selection of accounting principles and the most
critical accounting policies.
Understand the communications received from the external auditors concerning their responsibilities under
generally accepted auditing standards.
Confer with both management and the external auditors about the financial statements.
Assess whether financial statements are complete and fairly present, in all material respects, the financial position
of the company and that disclosures are clear and transparent.
Review earnings releases, financial statements, and other information presented with the financial statements,
prior to release.
The importance of
corporate governance lies
in its contribution both to
business and to
accountability.1
1
Paragraph 1.1 Committee on Corporate
Governance Final Report Hampel Committee 1998
the external auditor should identify the internal audit activities that are relevant
to planning and executing the independent audit;
in evaluating the external auditor, the committee should consider the auditor's
competence and independence, the scope of the audit and whether the fee is
sufficient to enable a quality audit to be undertaken.
increases the emphasis on risk and control, including the levels of authority
delegated to management by the board;
gives directors more insight into the organisation's accounting and control
systems;
creates a forum for the chief financial officer or finance director to raise
issues of concern and for the external auditor to assert independence in the
event of a dispute with management; and
Financial literacy
"...the substance of good Corporate Governance is more than it's form. Mere
adoption of a set of rules or principles is not a substitute for and does not itself
ensure, good corporate governance."2
Introduction
One of the key responsibilities of the audit committee is to oversee and ensure
the quality and integrity of financial reporting. As this includes assessing
managements' decisions on accounting policies and disclosures, evaluating
significant and unusual transactions, an audit committee cannot fulfill this role
without being financially literate. The importance of financial literacy is
highlighted in the Russian, United States and United Kingdom corporate
governance guidance, albeit to differing requirements:
"The board should satisfy itself that at least one member of the audit committee
has recent and relevant financial experience... It is desirable that the committee
member whom the board considers to have recent and relevant financial
experience should have a professional qualification from one of the
professional accountancy bodies."
United Kingdom Combined Code
The requirements above range from financial literacy to financial expertise. SOx
clearly defines financial expertise as an in-depth knowledge of accounting and
auditing standards, as well as a thorough knowledge of the company and the
industry in which it operates. Elsewhere, financial literacy in audit committees is
not clearly defined and could be explained as a good working knowledge of
accounting and auditing standards.
Common misconceptions
Management and audit committees must be careful not to be complacent, and
must be careful not to have any of the following misconceptions:
z
Good internal controls and risk management will necessarily result in good
quality financial reporting.
10
Self test
Included in one of the subsequent sections is a self-test, which should give
audit committee members an idea of the sort of knowledge required for true
financial literacy. It covers the basic accounting standards, involves understanding areas where accounting standards can be manipulated and how that
manipulation can flow through to the financial statements.
assigning high level individuals to oversee compliance with the ethical code;
Best practice also requires that companies should disclose the extent of their
adherence to the code of ethics and that they should consider the commitment
to organisational integrity of the individuals or entities with which they have
dealings.
11
The board has a critical role to play to ensure that it sets the correct tone at the
top and leads by example if this does not occur there is very little chance that
management or staff lower down will show any support for the process. The
audit committee, a vital element of the company's control environment, also
forms part of the "tone at the top" and it would have to subscribe to the code of
ethics.
Codes should also be updated from time to time to reflect changing attitudes
and standards. The following is an extract from a code that was developed in
the mid-nineteenth century: "Any employee who is in the habit of smoking
Spanish cigars, getting shaved at a barber's shop, going to dances and other
such places of amusement will surely give his employer reason to be
suspicious of his integrity and all round honesty". This policy would possibly be
inappropriate for most modern companies!
The board of directors should:
z
establish the values of the company in support of its vision and mission;
12
The Ethics Officer fulfils an extremely important role within the company, and has
to be a well-respected and committed individual that is able to communicate
effectively with staff at all levels. Some of the characteristics of the ideal Ethics
Officer are set out below. Usually, he/she will:
z
Have the skill to operate effectively with media, public forums and the legal
process.
Communication
A comprehensive communication campaign should be developed that will
involve the following:
z
Ensuring that a copy of the code/policy or an abbreviated version is presented from the CEO down to every employee in the organisation.
Media releases.
13
Independent
z
Where applicable, the external auditor, the head of internal audit, the chief
financial officer, the chief executive officer, the compliance officer, the risk
executive and, where appropriate, the chairman of the board should attend
all meetings by invitation. They are not, however, members of the audit
committee.
The board should appoint a chairperson that is an independent nonexecutive director and is not the chairperson of the board.
The board is responsible for approving the committee's charter and the
committee's workload periodically, and modifying it when necessary.
The board has the responsibility to ensure that the audit committee
functions effectively.
14
The term of office should be included in the audit committee charter and
decided upon by the board. A balance between the maintenance of continuity
and a fresh perspective should be considered when deciding upon the term
of office of each member.
The chairman should meet, independently, with each of the key role-players
prior to each meeting so as to inform him/herself more fully on all the
relevant information and developments.
These meetings would include the internal auditors, external auditors, and
relevant members of management.
The pre-meetings will mean that the audit committee meeting itself will be
focused, relevant and efficient.
The chairman may choose to have the other independent non-executive
members of the audit committee join these pre-meetings.
Properly resourced
z
The audit committee should have sufficient resources available so that it can
adequately discharge its responsibilities. This includes access to financial,
legal and other professional advice where necessary.
Audit committee members should be sufficiently available and be able to
contribute the necessary time.
15
Fully informed
z
The audit committee must have access to any information that it needs.
The audit committee must have the right to seek independent advice and the
A well run audit committee relies on an effective internal audit function, which
reports to it at each meeting and also has unrestricted access to the chairperson of the audit committee.
The internal audit function gets its authority from the board of directors, but
reports directly to the audit committee. The audit committee must assess the
skills and resources of the internal audit function; the scope of its activities
The audit committee evaluates the performance of the internal audit function
including having an external review regularly.
A well run audit committee accesses and reviews the outcome of the risk
management process.
The audit committee should understand the organisation's risks and the
The audit committee and the external auditor should develop a direct, strong
and candid relationship. Lines of communication and reporting should
facilitate independence from management and encourage the external
auditor to speak freely, regularly and confidentially with the audit committee.
It is important that the audit committee discusses any audit differences with
the external auditor.
The audit committee must actively ensure that it has a strong and candid
relationship with the external auditor.
The audit committee must determine the scope and fee of the external audit
and ensure that the audit is comprehensive.
16
The audit committee should obtain periodic reports from the legal
representatives of the entity, and meet outside counsel when appropriate, to
discuss legal matters that could have a significant impact on the entity's
financial performance.
The audit committee needs the assurance that management has an effective
compliance system in place.
Meeting with sufficient frequency and with the relevant role players.
The audit committee should hold a minimum of three meetings per annum.
The company secretary ideally should be the secretary to the audit committee.
The invitees should be limited to those that are familiar with, or responsible
for, the topics on the agenda.
Agendas should address the issues for which the audit committee is
responsible.
Good practice is to have a supplementary minute file which contains all the
reports presented to the audit committee, and which is referenced to, in the
audit committee minutes.
17
The audit committee chairman reviews and approves the audit committee
minutes prior to distribution.
Members are responsible for ensuring that the audit committee minutes are
a fair and accurate reflection of the meeting, prior to the audit committee
chairman authorising them on their behalf.
The minutes of the meeting of the audit committee should be placed before
the board at its meeting that follows that of the audit committee. This will
ensure that the board will not only receive the report of the audit committee
chairperson, but it will also have the opportunity to consider any other issues
that may be contained in the minutes that may warrant consideration in
addition to matters highlighted by the audit committee chairperson.
Companies should, in their annual report, disclose whether or not the audit
committee has a charter and, if so, whether or not the committee satisfied its
responsibilities for the year in compliance with its charter and terms of
reference.
The audit committee must strive for complete and accurate financial and
non-financial information disclosure that complies with all relevant annual
reporting standards and all relevant regulations with which compliance is
claimed.
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This text is an unaccredited and adapted by KPMG in Russia and the CIS version of The role of the audit committee text, prepared by
Audit Committee Institute sponsored by KPMG.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.